Walmart: Walmart's earnings met or exceeded expectations in the last year a nd concerns about its ability to grow dissipated, triggering renewed investor interest in the company. Not much changed in Walmart's fundamentals, but the stock price and P/E 2 moved higher. With our investment having exceeded our return expectations and greater downside risk accompanying the higher stock price, we scaled back our stake. We'll use Walmart to illustrate how an investment can come full circle – from buy to sell. Our original thesis, laidout in our 2010 Q4 commentary, is reprinted below.

Walmart (NYSE:WMT) seems anomalous in a world where stocks have rebounded so dramatically from the stock market's 2009 bottom. Walmart's stock averaged $48.59 in February 2009…. At that price, it traded at a TTM 3 and Forward P/E 4 of 14.5 and 13.0x, respectively. Walmart closed 2010 at $53.93 per share – more dear in price but cheaper in valuation – trading at a lower TTM and Forward P/E of 13.3 and 12.1x, respectively.

With more than 8,000 stores in 15 countries, in excess of 2 million employees, and more than 200 million customers each week, most everyone has heard of Walmart. And yet it seems relatively ignored by investors – a big change from a decade ago, when the market deemed its growth expansive enough to justify it trading ~40x earnings (both trailing forward). Investors may be disappointe d in its stock price over the last decade, but we don't feel there's much to complain about as far as its revenues and earnings growth go. Revenues grew at a 9.4% rate, while earnings per share compounded at 11.5%.

So where does that leave us, and how do you make money in a company that already has revenues exceeding $400billion and a market capitalization approaching $200 billion? We now feel that Walmart has grown its way (via earnings) into its stock price. We view Walmart as an infinite duration bond with a rising coupon – a "bond -like equity." We believe Walmart can grow at an acceptable rate well into the future and that the company will pay a fair dividend, as well as opportunistically repurchase shares, which should provide a high single-digit to low double- digit total return over time – not bad in the context of low single-digit interest rates.

We do not know if the above scenario will play out as exhibited, but we take comfort in the following:

Revenues have grown 5%, 8% and 9% in the last 3, 5, and 10 years, respectively. More than 25% of Walmart's sales come from overseas, and we expect foreign economies to continue to grow better than our own.

After dividends and share repurchases, we expect there to be additional free cash flow that will be used to drive the top line.

 Operating margins are unusually stable, ranging between 5.6% and 6.1% over the past decade. Walmart has exhibited tremendous margin stability, in part due to their stated goal of delivering cost savings to their customers in the form of lower prices. By not taking price into margin, we expect they will be able to pass through price increases in an inflationary environment – an advantage vis-à-vis competitors that keep efficiencies for themselves.We also note that extremely high inflation would hurt unit sales.

 Shares outstanding have declined by an average 2.2% per year since 2001 and have accelerated in recent years. In the first nine months of 2010, shares outstanding declined by 5.4%.

 The dividend payout ratio has increased in each of the last 10 years, from 17% in 2001 to 29% today.

 Incremental returns on capital have been quite good as management proudly exhibited in the company's most recent 10-Q. 6 Return on investment for the trailing twelve month period, adjusted to include rent, increased from 18.4%to 18.6%, and return on assets increased from 8.2% to 8.8%.

We continued to build our position in Walmart into the early fall of 2011. The stock price declined, reflecting a weak stock market, fears of dollar store competition at the low end, and concerns that Walmart's customers were among the hardest hit by the continued economic weakness. Ultimately, Walmart became a 3.8% 7 position because we believed the company was an excellent "compounder" as we communicated at the end of 2010. Since then, its business has continued to perform as expected, but its stock price has increased ~50% – a significant jump for the largest retailer in the world and a company with a market value now ~$250 billion.

In the last year, operating income has grown 5.7% and the company has repurchased 2.6% of their shares,allowing earnings per share to increase 7.5%. In addition, the company has paid dividends that provided a 3.0% dividend yield on the 2011 Q3 ending price. The sum of these metrics fell into the range of expectations listed in the table included in our 2010 Q4 commentary. Our original estimate of a 9% to 14%compounded return did not include P/E expansion (or contraction). A higher P/E was always the free option, and that option ended up in the money, with Walmart's forward P/E increasing from 11.8x to 14.9xtoday. 8 However, with a higher P/E comes greater risk of multiple contraction, and we therefore believe it's prudent to maintain a smaller position. Walmart is now just 1.6% of Crescent's portfolio. 9

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